Income from Salaries, Income Tax, Individuals

IncomeTax/Individual/Salaries/allowances/Frequently asked questions

Following FAQs will help get an understanding of some of the nuances of allowances received as an employee.

In which modes an employee can get his salary?

An employee gets his salary in any of the following modes from his employer :

Different Forms of salary

Example

Monthly basic salary (i.e., payment for his work)

Mr. Kumar working in Essem Ltd at a monthly salary of Rs. 84,000.

Monthly allowances (i.e., payment for meeting any specific objective)

Mr. Kumar is working in Essem Ltd. Apart from basic salary the company  pays him house rent allowance of Rs. 2,520 per month.

Different         perquisites        (i.e.,        different facilities provided by the employer)

Mr. Kumar is working in Essem Ltd. Apart from basic salary and different allowances paid to him, the company has provided him with free use of car. The car can be used for official as well as private purposes and entire cost of the car is borne by the employer.

1.   What is the meaning of allowance?

Allowance is generally a fixed amount given on a regular basis to meet some particular requirement. From taxation point of view, allowance can be classified as taxable allowance and exempt allowance. Exempt allowance can be further classified as follows :

  • Allowance for which exemption is based on specific method of computation.

  • Allowance for which exemption is based on lower of amount of allowance or amount spent for the purpose of allowance.

  • Allowance for which exemption is based on lower of amount of allowance or prescribed amount.

2.    Which are the allowances for which exemption is based on lower of amount of allowance or amount spent for the purpose of allowance?

As per section 10(14), in case of following allowances (by whatever name called), exemption is lower of : (a) the amount of allowance, or (b) the amount spent for the purpose for which allowance is granted:

Allowance

Example

Research   allowance   –   Any  allowance granted     to     meet    the    expenditure     on

Mr.      Kapoor       is      working       in      Essem Educational  Academy.   The  company is

academic research and other professional pursuits, is exempt from tax under section 10(14).

paying him Rs. 840 per month as research allowance to meet the expenditure on academic research. In the month of April, he had actually incurred no  expenditure on academic research. In this case, the amount of exemption will be Nil, being lower of amount of allowance or the amount spent for the purpose of allowance.

Uniform allowance – Any allowance granted to meet the expenditure on purchase or maintenance of uniform (for wearing during performance of official duty), is exempt from tax under section 10(14).

Mr. Kapoor is working in Essem Ltd. The company is paying him Rs. 2,520 per month as uniform allowance to meet the expenditure on maintenance of official uniform. In the month of April, he had actually spent Rs. 3,000 on account of expenditure on maintenance of uniform. In this case, the amount of exemption will be Rs. 2,520, being lower of amount of allowance or the amount spent for the purpose of allowance.

 

3.    Which are the allowances for which exemption is based on lower of amount of allowance or prescribed amount?

In case of the following allowances, exemption will be lower of the amount of allowance or amount prescribed under rule 2BB.

  • Children’s education allowance – Exemption in this case will be Rs. 100 per month per child up to a maximum of two children.

  • Any allowance granted to an employee to meet the hostel expenditure of his child. Exemption in this case will be Rs. 300 per month per child up to a maximum of two children.

  • Transport allowance granted to an employee to meet his expenditure for the purpose of commuting between the place of his residence and the place of his duty. Exemption in this case will be Rs. 800 per month. Exemption will be Rs. 1,600 per month in case of an employee, who is blind or orthopaedically handicapped with disability of lower extremities.

  • Hill area allowance or high altitude allowance or uncongenial climate allowance or Snow bound area allowance or avalanche allowance or Tribal area allowance Exemption in this case depends on the area of deputation (varies from Rs. 700 – Rs. 3000 per month)

  • Special compensatory allowance in the nature of border area allowance, remote locality allowance or difficult area allowance or disturbed area allowance. Exemption in this case depends on the area of deputation. Amount exempt from tax varies from Rs. 200 to Rs. 1,300 per month.

  • Allowance granted to an employee working in any transport system to meet his personal expenditure during his duty performed in the course of running of such transport from one place to another place provided that such employee is not in receipt of daily allowance. Exemption in this case will be 70% of such allowance up to a maximum of Rs. 10,000 per month.

  • Compensatory field area allowance (for certain specified area). Exemption is upto Rs. 2,600 per month.

  • Compensatory modified field area allowance (for certain specified area). Exemption is upto Rs. 1,000 per month.

  • Any special allowance in the nature of counter-insurgency allowance granted to the members of armed forces operating in areas away from their permanent locations. Exemption will be upto Rs. 3,900 per month.

  • Underground allowance granted to an employee who is working in uncongenial, unnatural climate in the underground mines. Exemption will be Rs. 800 per month.

  • Any special allowance in the nature of high altitude (uncongenial climate) allowance granted to the member’s of the armed forces operating in high altitude areas. Exemption will be Rs. 1,060 per month for altitude of 9,000 to 15,000 feet and Rs. 1,600 per month above 15,000feet.

  • Any special allowance granted to the members of the armed forces in the nature of special compensatory highly active field area allowance. Exemption will be Rs. 4,200 per month.

  • Any special allowance granted to the members of the armed forces in the nature of Island (duty) allowance. Exemption will be Rs. 3,250 per month.

It should be noted that an employee claiming exemption in respect of compensatory field area allowance and compensatory modified field area allowance cannot claim exemption in respect of special compensatory allowance in the nature of border area allowance, Remote locality allowance or difficult area allowance or disturbed area allowance.

4. What is the amount of exemption in respect of entertainment allowance?Exemption in case of entertainment allowance is available only to an employee of Central Government or State Government. Entertainment allowance is first included in the salary and then a deduction is allowed of lower of : (a) 20% of salary (i.e., basic salary only),or

(b) Rs. 5,000, or (c) actual amount of allowance for the year. This deduction is available only to Central Government and the State Government employees. Entire amount of entertainment allowance is taxable in the hands of non-Government employees.

Example

Mr. Suraj is employed in Essem Ltd. He is receiving entertainment allowance of Rs. 10,000 per month. His basic salary is Rs. 50,000 per month. In this case, entire amount of entertainment allowance will be charged to tax in the hands of Mr. Suraj, since he is a non-Government employee.

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